Introduction

Madison: Hello, everyone, and welcome to Not Just Numbers Honest Conversations with a Financial Advisor and Lawyer. I am Madison Demora, and I’m here with Mike Garry. Mike is a financial advisor and a CFP practitioner and the founder and the CEO of Yardley Wealth Management. He is also an estate planning lawyer, and his law firm is Yardley Estate Planning. Today, we’re excited to be joined by a special guest, our colleague, Maureen Donahue. Maureen is a certified financial planner and financial advisor here at Yardley Wealth Management. We’re thrilled to have her on the podcast today with us. Hi, Maureen. Hi, Mike.

Maureen: Hi, everybody.

Mike: Maureen, you ready for this?

Maureen: Yeah, let’s go.

Overview of Equity Compensation

Mike: All right, so, we’re digging into something that comes up often, especially with executives, tech professionals, those in leadership roles, and that’s how to make sense of equity compensation, like stock options and RSUs. They can be one of the most valuable parts of your total compensation and one of the most misunderstood. We get questions about this all the time, so we’re going to try to break it down, to better evaluate what you have, if you’re being offered it, and, how you can make some decisions.

Madison: All right, so let’s start with the big picture. When most people think what they earn, they think in terms of salary. But total compensation can include equity, bonuses, benefits, flexibility, and more.

Mike: Maddie that’s right. And, you know, for people in some fields, especially around here, we have a lot of people in, the pharmaceuticals, they get a lot of their compensation in RSU’s and stock options, and they often get to choose some things. And, those choices are pretty valuable. And over time, it winds up being a huge percentage of what people earn. And so it’s something you really need to know what it is. It might be simpler if you just got cash, but companies like to make it complicated like that. So. Maureen let’s start with stock options.

What Are Stock Options?

Maureen: Yeah. In simple terms, I like that. Because they’re not simple. Stock options are form equity compensation that you’re awarded, which gives you the right to buy the company stock at a certain price. That price is generally set when you’re awarded the stock, and then you can buy that stock over a certain period of time when it vests. Vesting periods can last, you know, one, two, three years. Every company is unique to them, but over that time period, you want that stock price to appreciate so that stock option has some value.

Mike: What should clients watch out for?

Risks to Watch with Stock Options

Maureen: For stock options, there’s a few things. First, you want to know the type. There’s two types. We won’t get into the nitty gritty of them, but there’s non qualified stock options which are the most common kind that people are awarded. And there’s ISOs. So incentive stock options, which are more preferable tax wise, can have their own tricks to them too. So you do want to watch out for both is the timing, how long do they vest? We talked about that vesting period. You don’t want to miss the opportunity to buy that stock, if it expires. The next is liquidity. For private companies, especially if there’s a liquidity event, there might be a timing associated with when you want to exercise that option. And then, taxation. We talked about ISOs and non qualified stock options. They have different taxes treatment. So generally we say talk to your tax professional, think about it when you want to exercise them. Because you do have the option to choose what year and when to exercise them after that vesting periods over. And then again the other thing I always say when we talk about the expiration is if you are close to retiring and thinking of retiring, you want to make sure you also get the value of those vested options by thinking about should I sell any or exercise any before retirement? Because they might expire after you retire.

Mike: But with companies do different things with that. Right. Like sometimes, like they might all vest. Sometimes you just have what’s there on the plate when you stop. And so it’s again part of retirement planning. Right. You should check with your benefits to see how they’re treated.

Maureen: Yeah. And I think two people kind of look at the price and say there’s not much value there. But you know, a lot of times you can do what’s called a cashless exercise. So you can exercise those options and buy the stock, and then sell some of those stocks to pay for everything. So whatever you net is what you net, even if it’s only a couple thousand. So it really is something to keep, keep track of.

Mike: Yep. Yeah. I remember years ago there was a, employee benefit book. I’m not going to say the name of the company in case I get it wrong, but they said that to generally, exercise when the prices twice the strike price. And I, I thought, wow, that is really, you know, the, the roaring 90s. Because you know, after that we had people who had worthless options in the odds from 2000 to 2010. A lot of people had options that didn’t exercise them in the 90s because they were hoping to go higher. Stocks got hit hard 2000, 2002, and then again 2008, 2009. And so a lot of people wound up with, like, worthless options. And so I think. And since that’s kind of really when I started in here, I have, I don’t know if it’s cynical view or like, I look at them as, like, how can I get money out of them? Instead of, oh, maybe the person will get like hundreds of thousands or millions. It’s like I want to make sure I get something, I guess, you know, having the experience of having people have them for years and then be worth nothing to them really kind of jaundice my view. All right, so I think that’s enough for options. Maddie, what’s the next question?

How Are RSUs Different?

Madison: Yeah, so how are RSU’s different?

Maureen: So with RSUs, they are simpler because there’s less decisions to make. With an RSU, you’re awarded the stock outright. Now you can’t sell it right away most of the time, you have to wait the same thing on that vesting period. And when it vests, that’s when you pay the tax at ordinary income for the value of the stock. Often it’s a simpler decision because you want to sell the stock when it vests because you’ve already paid the tax. You can be hopeful and say, hey, that stock’s going to rise and I’m going to get more money for it. And you’ll pay tax just at or not an ordinary income at capital gains rates, you know, on the growth. But it also can work the opposite, which is why we say, just sell it and diversify it. It’s just a much easier tool to use in the form of equity compensation.

Mike: Right. Before I let Maddie get to her next question, one of the things we talk to people is, like, you know, when they have those shares and they’re worth 100,000, $200,000, you know, like, if the company gave you that $200,000 in cash instead, would you spend all of it to buy the company shares? The answer is no one has ever said yes to that. Even people who love their company, no one says yes. So think about that.

RSU Tax Implications

Madison: Yeah. So RSU may be simpler, but of course, they still have tax implications.

Maureen: Yeah, exactly. They’re just not as much as you can control. As I mentioned, when they vest, whether that’s a one, two, three year vesting period or sometimes they vest more frequently, you have to pay that tax at ordinary income. So it’s kind of just something that’s part of your compensation. Just like a bonus.

Mike: Yep.

Making Smart Decisions with Equity

Mike: So how do we help clients make smart decisions around equity?

Maureen: Yeah, so for us, for the options, we advise around keeping track of them and being mindful. You know, Mike, you did talk about, it’s really hard to say, hey, like, let’s get those equity we can out of those, depending on the company and the stock. You know, we’re looking at, we said pharmaceuticals, so let’s use JJ as an example. They’re pretty steady company. You know, we don’t see them necessarily going out of business, not going anytime soon. So we might hold those to expiration and let them grow over their lifetime. For other options, we try to advise clients the best we can, but we like to use the saying, we don’t have a crystal ball, so we don’t know where it’s going to go. But if there’s some value in those options, meaning the stock has grown above the strike price and we’re able to exercise and sell them, it might make sense. But they’re a little trickier, as we talked about, because you do have to keep track of them. For RSUs, our general strategy for those is when they vest and you pay that ordinary income tax, we just sell them and diversify them or, you know, pay off debt or whatever your goals of your plans are. And then we always talk about as all of these items have is taxes. So we like to run tax projections just to stay ahead of it and be aware of what could be the tax implications and also work with your tax professionals to make sure that you’re prepared at tax time. Are you going to owe more? Should we withhold more? We just have a good idea of what you’re going to be looking at in April.

Mike: Yep.

Evaluating New Job Offers with Equity

Mike: All right, so, let’s shift to another common scenario. So someone’s getting a new offer. What should they be asking? What should they be looking out for?

Maureen: Yeah. So when you look at the new offer in terms of equity awards, you do want to look at the vesting schedules. You know, how long are they going to vest for? How long do you have to stay working there? Equity compensation is a way to keep employees employed there. So that’s why you have to stay until they vest. Also liquidity restrictions. You know, are you a key person that might be subject to blackout periods? What are those blackout periods? And are they going to restrict you from timing things such as having an option? So maybe RSUs are better fit if you do have those blackout periods. Then the idea of potential for a future grant, what is, what’s written in that offer letter? You know, is it, you know, grants generally come, your bonus comes 50% in cash, 50% equity options. Do you get to choose the mix of equity options, versus RSUs? You know, what are you kind of getting? What is the choices you have? And then also the company, you know, is it have a record of buybacks? Is that stock that you’re going to get in the form of options or RSU is going to be steady or is it going to really be unknown? Because the company does a lot of different maneuvers.

Mike: Mo, thank you for, joining us for this one. Because you have a lot more experience recently with stock, options and RSU’s versus mine. And so it’s good to have you here for that. Among other reasons. It’s good to have you here. And then, to, listeners, like, if you’ve been granted equity or considering an offer that includes options or RSUs, you know, don’t just look at the number. Like, look at all of the, how it works, the vesting schedule, the timing, how it fits into your long term financial strategy. Remember, like, you are there like, not to maximize RSU. You’re there to maximize your personal situation. Right? That’s why you’re at work. You know, and we can be here to help make smart decisions, not just about what to earn, but how to use it and how to support, like, the life that you want. That is literally our job.

Closing Remarks

Madison: For more information on Yardley Wealth Management or Yardley Estate Planning, you can visit our websites at yardleywealth.net and yardleyestate.net. You can also follow us, on socials at Yardley Wealth Management. Don’t forget to subscribe to our YouTube channel. This podcast has been produced by Madison Demora and Mike Garry with technical and artistic help from Poe Productions.